Tell me this wouldn’t work regarding remortgage and borrowing for extension

[Tootoot8]

Fixed term ends June 2024. We’re very happy in our house and can see ourselves being here for a while. We’d like to do an extension costing approx £50k. We realise our mortgage cost is going to increase A LOT and the cost of this extension is going to be ridiculous at the current time.

Could we remortgage, borrow the extra £50k, put the money in a savings account and sit on it for a few years until things settle down? The interest accrued could pay off some of the horrible extra interest we’d be paying on the mortgage.

Is this possible/legal/feasible? Or is there no way out from this spiralling costs hell.

I expect that, subject to meeting the lenders LTV and affordability rules, you could borrow the extra £50k and tell them it’s for home improvements. Then just not do them straight away. But surely you’ll be paying 6+% interest on that £50k while getting less than that, after tax, on the cash on deposit. Especially if you’re higher rate taxpayers. I can’t see how it’ll offset the extra interest. Why not just borrow the extra money in the future, if/when you need it?

Yes, what Tryingtokeepgoing said.

We remortgaged about 8 months ago because our fixed rate was up and took extra cash at that point and put it in savings until we were ready to start an extension. The rates have increased since then and so now we are earning a better rate on the savings than we were paying on the additional mortgage. We have been very lucky with the timings, but we are now spending the money anyway as we are doing the work.

This is pretty much the only scenario in which your plan would work. You would be borrowing at high rates already, and gambling on them still continuing to rise.

I guess it is a gamble and it only helps until we start work. The issue is that we’re likely going to fix for 5 years and would rather have all the debt together, but don’t want to wait 5 years before extending.

We did very similar recently and if you are applying for extra lending on your mortgage for an extension, the criteria for lending also had to include a quote for the works to be done, planning permission for the works and proof of funds if there is a difference in what you are borrinwg vs the quote.
In terms of starting the work it doesn't matter, we tool ours out so we had it ready for the builder starting 6 months later . Hope that helps :)

We did this and started work 9 months later. We had to evidence the planning permission we applied for. Gained around 1.5k in interest during that time.

You may find the additional funds sit separately to the bigger part of your mortgage.. so only the 50k will have higher interest rates on it and your existing mortgage can be changed as normal?

I’m not sure what the advantage is of ‘having all the debt together’? We have ended up with different sub accounts on our mortgage with the same provider, with just one payment covering them coming out.

What I mean is, taking out a new fixed rate now on your current mortgage doesn’t stop you borrowing more at a later date on a different deal, and having one overall mortgage payment coming out.

We weren't asked for quotes or planning permission when we took extra borrowing for an extension a year ago. LTV still quite low even with extra borrowing though.
Isn't it pretty unlikely an extension will cost just 50k?
Bear in mind that if your circumstances changed and you had to apply for benefits, you might not be eligible for any UC at all with that much sitting in a savings account.
Otherwise it seems a good idea, and similar to what I am planning to regarding stopping making mortgage overpayments into my mortgage that is still on a v.low rate and pay it into a saving a account earnjng higher interest instead, ready for when I remortgage.

We haven’t ever added additional borrowing into the mortgage so didn’t know it could be so straightforward when done separately to the main bulk. That’s good to know.

I think 50k might be optimistic right now. A builder two years ago quoted 30k for the basic build (North of England) but everything seems to have gone up so much. I don’t think paying upwards of 50k would be recuperated in the house value so we’d be reluctant to do that with this instability.

Sorry if I have misunderstood you but you know that if you borrow more now you will not be able to borrow it at the rate of your current fix, don't you? It'd be at whatever rates are offered currently so it's unlikely you would get more interest for it in savings than you would pay for taking the loan.

Isn't it likely that the cost of the work would also rise, at least offsetting any possible gains in your plan?

Depending on the size of the extension, 50k isn't unreasonable for the north of England. Ours was a decent size (47sq.m) for £56k ... in the last 6 months, if that helps ease any worries about the cost increases?

It all depends what rate you will pay on the borrowing. We took out £40k of equity a couple of years ago to build a garden office/new kitchen/do the garden. It was essentially a second mortgage as we weren't due to remortgage. That was an affordable 1.8% at the time.

We're about to remortgage and we're taking out an additional £75k incase we decide to send DC to private school. Fixed the mortgage rate at 4% in May and won't need the cash for 5 years so I fully intend to max the savings interest in fixed ISAs etc which will be higher than 4%. If we don't use the money we'll just put it back in the house when we remortgage. Perfectly legal.

I don’t think paying upwards of 50k would be recuperated in the house value

Your lender is only likely to lend up to the max LTV of your house AS IT IS - eg if your house is worth £300k, outstanding mortgage £250k, max loan to value 90%, you'll only be able to borrow up to £270k anyway.

If you took out an offset mortgage for the higher amount you could put the cash in the savings part thus effectively not paying interest on it until you spend it.

Pretty much this. Otherwise everyone would be gaming the system.

It was close to 20 years ago but we took more than needed when Re mortgaging so we had access to funds if and when required. We had an overpayment account it could sit in linked to the mortgage and the interest balanced out. All the time it was sitting in the account we paid no interest in it but also didn't get any interest on it. It worked well, no idea if there are options available like that now.

If you're not planning on doing the extension in the short term, wouldn't it be better to just sit tight for now and save as much as you can - maybe work out what your mortgage will cost at the new rate and with the extra £50k of borrowing, and save the amount above what you are currently paying, or more if you can afford to, towards your extension?

Then remortgage as normal next year, taking extra if you are ready to start your extension, and if not, just do a standard remortgage and borrow as a homeowner loan later?

Bear in mind that if you borrow more, the interest rate could be higher due to higher LTV.

When we had our extension, we saved for most of the cost while interest rates, and hence our mortgage repayment, were low, then we topped up the cost by putting the kitchen units, appliances etc on an interest free credit arrangement and took out a £10k personal loan for the rest. So we only paid interest on a small amount of the money we needed and it was only slightly more than mortgage rates anyway.

I agree with @BarbaraofSeville I'd be waiting but saving the difference of what the new payment would be.